Farmer Bros (NAS:FARM) — mrkt cap 76mm; Price $3.59; EV/EBITDA NA
PASS. Farmers Brothers provides a portfolio of coffee supplies for approximately 40,000 businesses, mainly convenience stores and restaurants. Our research on FARM towards the end of last year suggested that “more research was needed” following the sale of their low-margin segment and management replacement. Since then, we’ve had several calls with the new management. While they seem highly competent, it’s evident that significant operational enhancements are necessary for sustained profitability. If successful, these improvements could yield significant operational leverage. However, gaining a concrete understanding of how effectively management will address the numerous operational overhauls required remains challenging for us.
Bayer (OTC:BAYRY) — mrkt cap $32B; Price $7.88; trailing EV/EBITDA 12
PASS. BAYR has had a tumultuous period with zero share price appreciation over the last twenty years. The reason for this is an ill-timed acquisition of Monsanto which saw them pay legal bills to the tune of 11 billion due to a class action suit claiming that Roundup was carcinogenic. Bayer has dropped roughly 70% since that acquisition. At the current valuation, the market is ascribing little value to the 32 pharma drugs in the pipeline which cost BAYR roughly ten billion dollars. There is still some litigation overhang and coupled with a decline in profitability from the crop science segment due to a normalization of prices, we believe a more attractive entry point can present itself in the near future.
Vital Farms (NAS:VITL) — mrkt cap $740mm; Price $17.88; trailing EV/EBITDA 17
PASS. Vital Farms is a company that specializes in producing ethically sourced pasture-raised eggs. VITL has grown revenues at a 30% CAGR for the last five years and currently is in over 25k stores nationwide. VITL’s brand allows for premium prices which is why their gross margins are almost 2x that of other egg producers. Ethically produced is a core value for VITL; their eggs consistently rank among the healthiest (VITL allows for more than 100 sqft of pasture for each chicken while competitors allocate <1 sqft). VITL has ambitious targets and is aiming to reach 1B in revenue by 2027 with 12% EBITDA margins. We believe it is likely they can reach this however the multiple is a little rich for us and we will wait for a pullback to initiate a position.